Market story: Zoom Video Communications in the post-pandemic environment 🖥️

Future of the Video Conferencing Sector

The true breakthrough in the video conferencing software market turned out to be the COVID-19 pandemic. In 2020, the global lockdown necessitated firms to implement solutions enabling remote communication. Remote work also flourished during that time, becoming a necessity for many businesses during pandemic times. Now, although the macroeconomic environment no longer exerts external pressure on businesses to maintain remote work, it seems that this form will stay in the market for good. Moreover, even though in 2024 the global epidemic does not compel the introduction of remote work offers, this market still has significant growth potential.

The pandemic demonstrated that there are sectors (e.g. IT) where remote work can be implemented without a clear decline in productivity, and office work is not a necessity. This led to a significant habituation among employees to remote work offers. According to a KPMG report from 2023, the main factor shaping the development of remote work offers among surveyed firms was the interest and demand for this form of work from employees (73%). The second most significant factor in creating access to remote work was the ability to enhance the attractiveness of firm offers (53%), as well as attracting new talents (38%). Due to the development of remote work, companies are no longer limited to using the services of people living in the city where the company is headquartered, but instead are open to recruiting employees not only from the entire country but also from around the world. Employee habits, the possibility of effective cooperation between domestic and international branches, and the increasing demand for recruiting new talents reinforced by the lack of limitations related to the place of residence constitute strong impulses for the growth of the entire sector. Thus, according to forecasts by Fortunate Business Insights, the global video conferencing market worth $28.61 billion in 2023 could grow to $33.4 billion in 2024, and its estimated value by 2032 will be $60.17 billion, representing an average annual growth rate of 7.8%.

Zoom Video Communications in the Post-Pandemic Period

Zoom Video Communications was one of the companies that benefited most during the "COVID boom" in the remote work market. The appropriate software needed for the remote communication proved to be a crucial tool used by companies during lockdowns. This allowed the company to increase its revenues in 2020 and 2021 by 88.4% and 325.8%. The strong revenue growth dynamics did not remain without reflection in the stock price, which reached $589.66 at its peak in October 2020, increasing YTD by over 720%. At that time, the main driving force behind the company's growth was primarily the uncertainty about the future and the prospect of a prolonged lockdown. With the end of the pandemic, the pace of revenue growth of the company stabilized. In 2023, the company recorded a 7.1% YoY growth, and since the second quarter of 2023, the average QoQ growth has been 3.27%. From its peaks, company shares have lost almost -90% in value.

Company's outlook for the next quarters

The significant decline in the revenue growth results from changes in the market environment and increased competition. Despite the prospects for the growth of the entire video conferncing market, relying solely on a communication service platform is not enough to compete with companies like Microsoft or Alphabet. These companies, apart from communication applications (Microsoft Teams or Google Meets), also provide comprehensive solutions supporting clients' activities.

Zoom is also not lagging behind in this regard and is actively developing its product catalog within its platform, transforming it from a video communicator into a comprehensive system of services allowing for chat, planning meetings, corporate calendar management, and expanding the platform with software allowing e.g. note-taking, document creation, or video recording.

Thanks to this, Zoom can count on not falling behind in the technological race and maintaining its leading position in the video conferencing software market. The full effects of product development are likely to be seen in 2H of 2024, which can also be seen in the company's cautious revenue forecasts. In the first quarter of fiscal year 2025 (ending in April 2024), the company expects to achieve $1.13 billion in revenue (+2% year-on-year), while for the entire fiscal year, it forecasts growth to $4.6 billion (+1.7% year-on-year).

Despite the slight revenue dynamics, Zoom draws attention with strong profitability. At the gross margin level, the company maintains a stable level of around 75% after the period of stabilization of revenues (in the years 2022-24). The ongoing work on the development of the Zoom platform contributed to a temporary increase in R&D costs, the growth dynamics of which, however, is now clearly weakening. Thus, the market consensus assumes that the company will achieve an operating margin of around 37% in the coming years, which, given the strong development of the offered products, seems to be a probable scenario (while assuming a value close to the average values for the last 3 years).

It is also impossible not to emphasize the strong cash position of the company. Zoom currently has $6.96 billion in cash and short-term investments, which constitutes over ⅓ of the company's total market capitalization. Moreover, the company continues to improve its cash position by increasing cash flows. In addition, company is almost not indebted at all.

Assuming conservative revenue growth in the coming years (+1.7% in 2025, +4% in 2026, and +3.5% in 2027), achieving an operating margin by the company according to consensus of around 37%, as well as maintaining CAPEX compared to revenues at the level of 2.9% in 2025, 3.2% in 2026, and 3.5% in 2027 (trend from the previous 3 years), we obtain an EV/FCF ratio at the level of 10.51x. At the current price range of $58.99, this implies a potential growth of 12.7%.

Of course, these are only illustrative calculations aimed at showing the current market valuation of the company in the perspective of a conservative scenario. If the company fails to achieve the assumed margins and the products developed by the company prove to be not sufficiently attractive compared to competing products (including those of Microsoft and Alphabet), further declines in the stock price can be expected.

Zoom Video Communications shares have lost almost -90% in value from the pandemic peak. Source: xStation.

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